Why Didn’t I Buy This Mining ETF?

Why Didn’t I Buy This Mining ETF?

The strong market close on Monday finally appears to have gotten the market's attention as the tone of the market commentary has turned decidedly more bullish. Even the major Wall Street strategists have started to raise their year-end forecasts for the Spyder Trust (SPY) and the S&P 500.

Many are now accepting the view that the S&P 500 will make a new all time high though the NYSE Composite and small cap Russell 2000 are still well below their 2015 highs. The market's strength has been forecasted since early March when the intermediate term analysis of the NYSE and S&P 500 A/D lines turned positive.

The daily A/D lines have been leading prices higher since February when I cautioned investors and traders "Don't Follow Those Bearish Traders". The recent surge in bullishness is likely due in part to fear as they have been fighting the rally since the S&P 500 was 150 points lower. They are likely concerned that because of their poor 2nd quarter performance they may lose investors.

It has been eleven days on the upside since the May 19th lows as the Spyder Trust (SPY) has gained over 4%. No market goes straight up or straight down so a sharp pullback is likely in the next week or two though it may come after the market makes new highs. The daily technical studies are positive so any pullback should be well supported.

For both investors and traders risk control is the key to success which is why I place so much emphasis on determining the entry strategy for the ETFs or stocks that I recommend. This process takes considerable time as a wide range of different methods are used to target the buying levels.

The SPDR S&P Metals & Mining ETF (XME) was on my Viper ETF buy list after last Friday's close and it was up 2% on Monday, so what didn't I recommend it?

The SPDR S&P Metals & Mining ETF (XME) has assets of $600 million with 23 holdings and an expense ratio of 0.35%. Over 52% is concentrated in the top ten holdings. It was down over 50% in 2015 but is up 58% YTD and one should expect it to generally be more volatile than the Spyder Trust (SPY)

- The weekly chart shows that XME after an early May high of $25.06 corrected to a low of $20.01, line a, in just over two weeks.
- The longer term downtrend, line a, and the daily starc+ band are in the $25.50 area.
- The 50% retracement resistance is at $27.09 which if overcome should signal a move to the 61.8% Fibonacci retracement resistance at $30.75.
- The weekly relative performance moved above its WMA two weeks after the January low.
- The RS turned higher last week after testing its rising WMA.
- The OBV also bottomed before the major market averages made their lows and subsequently rose well above the 2015 highs.
- The OBV flipped back to positive last week by surging back above its WMA.

The daily chart of the SPDR S&P Metals & Mining ETF (XME) shows that it gapped higher last Friday to close at $23.15. It moved even higher on Monday and is already close to the daily starc+ band at $23.95.

- The 20-day EMA has turned up and is now at $22.03 with last week's low at $21.42.
- The daily chart support (line c) is now in the $20-$20.50 area.
- The daily relative performance moved back above its WMA in the middle of last week and is now rising strongly.
- The daily on-balance-volume (OBV) was stronger than prices throughout the correction and broke through resistance (line d) one day after the correction lows.
- The OBV is already above the early May highs as it continues to act much stronger than prices..

So why not buy? The SPDR S&P Metals & Mining ETF (XME) closed on June 3rd at $23.15 which was 7.5% above the week's lows. Even in a bullish trend a short-term pullback in such a volatile ETF could have triggered stops below the week's low.

A more reasonable stop level in my view would have been under the weekly S2 support level at $20.63 and also the previous week's low of $20.53. The 14-day ATR is 0.80 so a pullback of 1/3 the ATR from Friday's high would mean an entry at $22.91. With a stop at $20.47 that would have meant a risk of 10.6% which in my view is much too high. It would have taken an entry at $21.49 to reduce the risk to 5%.

I will continue to watch this ETF as it is likely there will be a reasonable risk strategy in the next week or so where the potential risk can be better controlled.

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Tom Aspray has been analyzing and advising institutions and investors on the financial markets since the early 1980’s. Tom has gained the respect of other leading technical analysts over the years even though he has avoided seeking the limelight.

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